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Pay off my mortgage or invest in another property?
Paying off your mortgage early is always wise, but taking on more debt to buy an investment property can be lucrative too. Let's look at the pros and cons of both strategies.
Paying off your home loan faster makes sense. The faster you pay off your mortgage the less you will pay in interest.
But you could also take on more debt and buy an investment property. This is obviously a very big and risky decision, but if done correctly it could set you up with an investment that improves your financial position.
Let's examine both options in detail.
Pay off your home loan faster and get out of debt
Reducing your mortgage debt is always a good idea. If you had a $500,000 mortgage over 30 years with a 4% interest rate, you'd end up paying $359,347 in interest on top of that.
If you were 10 years into that mortgage and you started paying an extra $200 a month in repayments you'd end the home loan two years and three months faster. Plus you'd pay $22,000 less in interest.
Try our extra repayments calculator for yourself
The benefits to paying off your mortgage faster are obvious:
- You can save more of your hard-earned cash.
- Being debt-free means less worry about repayments and more financial freedom.
- Your property is a form of wealth: the less debt you hold, the more equity you'll have.
Get some quick tips for paying off your mortgage faster.
Buy an investment property
But not all debt is bad debt. If you're borrowing more money to invest in an income-producing and wealth-creating asset, such as an investment property, that's a pretty productive debt.
Buying an investment property rather than paying off your home loan allows you to produce rental income, enjoy tax benefits from negative gearing and eventually see a capital gain from the sale of the property. In this light, taking on extra debt doesn't seem unreasonable.
And while paying off your mortgage faster makes financial sense, the greater benefits come from doing this early in the loan, not later. This is because of compound interest. Early repayments at the start of a 30-year loan are far more effective in cutting down interest than extra repayments made 20 years into the loan.
Property investor tax benefits
When you're paying off the mortgage on your home you can't deduct your interest payments from your tax. But you can with an investment property. In other words, the interest you pay on your investment mortgage can help reduce your tax bill.
For this reason, many investors focus on shrinking the mortgage on their home first: that debt has no tax benefits.
Get more tax tips for property investors.
But can you handle an investment property?
So, as we've seen above, there's no right or wrong answer. Getting out of debt is always a good idea, and buying an investment property later in your mortgage is a strong option too.
It all depends on what you can handle. "The decision to invest in another property when you already have a home loan is a pretty big decision because you're taking on more debt," says Financial Spectrum managing director Brenton Tong. "Probably the most important consideration of your financial position at the time is your cash flow.
"You can have an enormous amount of equity in your property and you could almost have your property paid off, but if you don't have the available cash flow to fund additional debt then you're going to be putting yourself in harm's way. If, on the other hand, your debt is quite high and your equity is quite small yet you still have an abundance of cash flow, then quite possibly you might be in a position where you can get into property investment much earlier than you think you can."
The bottom line: don't buy an investment property if you don't have the cash flow to cover the repayments and property maintenance. Obviously having a rent-paying tenant reduces the money required, but you need to anticipate higher costs, property damage and periods without a tenant.
The risks of investing in property
Property investment is never a certainty (no investment is). Here are some risks to be aware of:
- Being a landlord is work. You have legal responsibilities to maintain your investment property so your tenants can live in it. This can be costly.
- A property can lose value. There's no guarantee that the property you buy will grow in value year over year. You need to do your research and buy a good property in a good location.
- You might not find a tenant. Untenanted periods mean months without rental income and that can make your investment very expensive.
Other investment options
Mortgage repayments and property investments certainly aren't your only options. Here are some more possibilities for home owners with extra cash on hand:
- Put more money into an offset account. If you mortgage has an offset account you can put extra repayments here. It mimics the effect of extra repayments but you can pull the money back out to spend on an investment or anything else. It gives you greater flexibility.
- Add to your super. Putting more money into your super fund can set you up for a comfortable retirement.
- Make smaller investments in shares or ETFs. Investing in shares or products like exchange-traded funds (ETFs) lets you put your money to work without the massive commitment of purchasing an investment property.
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I am 61 and my husband 58. I no longer work but my husband still does. we have one property valued at around 380,000
we have 300,000 in bank and have kept a home loan of 100,000
this is offset by money in the bank and the rest of the money is earning interest at 3.6%.
My question is do i pay of the mortgage, we will still have 200,000 in case we need it.
my husband earns 95000 gross per year. and has superannuation. my superannuation is part of that 200,000. what is the equation for it to work for an investment property?. we would be hoping to resell the property in 5 years. how much rent would you need to be getting if you paid 260,000 for a property.
Hi Colleen,
Thanks for your question.
Please note that finder.com.au is an online comparison service and is not in a position to be giving financial or investment advice.
Regretfully this question is beyond the scope of this forum. It is recommended that specialist advice be sought from a financial planner.
Cheers,
Shirley
My husband and I have recently bought our second investment through a brokerage agency.At the time my husband’s income was treble to what it is now.We also own another investment property which is more than 40 years old, we pay tax on the rental income from this property as is more than the expenses.We are also paying off a mortgage.Would we be better off selling the old property and pay off our mortgage and keep the new investment or not
Hi Raelene,
thanks for the question.
I would recommend contacting a trusted financial planner to get an answer to this question which will take into account all of your personal circumstances, including tax and more.
Sorry I couldn’t be of more help,
Marc.
Hello, we currently own our home in FL, with only $25K owing on an equity line of credit. We also owe $12,500 on a bank credit card. Our home is valued at approximately $275K. We live in Australia & pay $1100/month rent. Would it make sense to purchase a home or unit in Australia instead of paying rent each month? We rent our home out in FL about 6 months/year which covers most of our monthly expenses. Thank you
Hi JD,
Thanks for your question.
Unfortunately we don’t provide financial advice on finder.com.au. Please speak to your trusted financial planner to help you with this.
Cheers,
Shirley
Currently have two properties, however have lost my job, have rental coming from one property of 1700 and another coming in at 1500 a month, currently paying off both home and investment property, ANZ won’t structure or refinance differently for me, also have a line of credit am up to 50 now, limit is 80, am running out of ideas to save both homes, is there anything I can do apart from selling one, now before it gets worse, or is there a way to keep both going, am on temporary work as of Monday, but need some help fast,,!
Hi Teena,
Thanks for your comment.
Please see this page about your options, otherwise it may be worthwhile to seek financial counselling.
Hope this helps,
Shirley